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The impact of high fees on savings

We often associate high cost with high value, and while this can work for cars, phones, and other goods and services, it is not true for the fees you pay to manage your investments. In fact, high fees have a corrosive impact on your savings.

We often associate high cost with high value, and while this can work for cars, phones, and other goods and services, it is not true for the fees you pay to manage your investments. In fact, high fees have a corrosive impact on your savings.

Over time, high fees will eat away at the value of your account, leaving you with less money in your retirement years. To understand how fees affect you, the individual investor, consider the following example:

Types of fees

If you are in an employer-sponsored plan such as a 401(k), 403(b), or 457 plan, you can expect to pay the following fees.

Investment fees. These are the fees charged by mutual fund companies to pay for the costs of managing 401(k) plan investments. These are the largest fees you pay and are charged annually as a percentage of your account balance.

A typical percentage is 0.63%, but it isn’t uncommon to find fees ranging from the low end of 0.25% to well over 1.3%.

Plan administration fees. These are the expenses involved in the day-to-day operation of running a 401(k) plan, including recordkeeping, accounting, online access, and customer service. The administration fees may be charged by the financial company that manages your plan investments (the “plan provider”) or by an outside company hired by your employer to handle the administration of the plan.

To ensure you have the most money available to you in retirement, you want to look for an investment vehicle with low annual fees. If your employer doesn’t offer a 401(k) fund with low fees, consider rolling your savings into a low-cost IRA like Icon.

 

* All figures in 2012 dollars. Workers are assumed to begin saving at age 25 and retire at age 67. Example reflects median salary of $30,502 when worker starts saving at age 25. Example provided by CAP.

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